December 2005 Edition
JOHN WILLIAMS' SHADOW GOVERNMENT STATISTICS
Issue Number 14A
December 7, 2005
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Manipulation of Key Data Continues As Inflationary Recession Intensifies
Touting "Booming Business," Bush Disconnects from Main Street U.S.A.
Administration Sees Fourth-Quarter GDP Slowing to 2.8%
Dollar Euphoria Likely Short-Lived
"The economy is strong. Business is booming and the people of this country are working," proclaimed President Bush on December 5th.
Citing reports of strong GDP growth, strong jobs growth and low unemployment to back up his statement, the President would have had a legitimate claim, if only the numbers in those reports had not been phony. The problem for Mr. Bush is that the public knows better. Ask Main Street U.S.A. what is happening, and recent polls suggest the answers more likely would be recession than 4.3% GDP growth, lost jobs instead of 215,000 new jobs in November, and an unemployment rate closer to 12-percent than five-percent.
With blame for the President's historic-low approval rating going to the War in Iraq and the economy, the administration has launched a public relations blitz to turn public opinion. Part of the propaganda campaign appears to have included orchestrated improvements in reported GDP and jobs growth.
Reuters reported (December 5th) that "Bush has trumpeted news of a 215,000 jump in November jobs as evidence there is 'every reason to be optimistic about our economic future.' But Allan Hubbard, Bush's top economic adviser, acknowledged on Friday there was a 'disconnect' between numbers like the jobs figure and how Americans feel." It is that disconnect that should be sounding the alarm bells for the markets that there is something wrong with the numbers.
After third-quarter GDP growth was revised upward to 4.3%, the administration upped its official GDP forecast for 2005 to 3.5% from 3.4%. The hoopla around that announcement was well orchestrated, but one has to wonder if any of the in-house political geniuses double-check the White House's own numbers.
The "upped" forecast implies a 2.8% annualized quarterly real growth rate for fourth-quarter GDP, a 35% slowdown from the third quarter's robust 4.3%. The calculation is as follows: The 3.5% annual GDP forecast was for year-to-year real fourth-quarter growth. Allowing for the maximum growth that doesn't round up to 3.6% -- that is 3.549% -- applied to fourth-quarter 2004 real GDP of $10,897.1 billion dollars, calculates to a fourth-quarter 2005 real GDP of $11,283.8 billion, which is up at an annualized rate of only 2.8% from the latest third-quarter real GDP estimate of $11,206.1 billion. A safe political prediction is that fourth-quarter GDP growth will top 2.8%. They should have upped the annual forecast to 3.9%.
Beyond manipulations in GDP, employment and the CPI, most other major indicators show the economy to be in trouble. Still, Wall Street is hyping the White House's imaginary numbers and tends to excuse away lesser data that don't tell as happy a tale.
The current fantasy world of the government's key economic statistics also may be helping to fuel irrational exuberance in U.S. dollar trading, although the currency markets usually are pretty good at cutting through political hype. As shown in the accompanying graphs, recent dollar strength has been significant with annual growth at a five-year high for the SGS Financial-Weighted Dollar and almost a four-year high for the FRB Trade-Weighted Dollar (see dollar section).
The dollar's strength has been a tonic for the equity markets and has helped suppress upside movement in long-term interest rates. Unfortunately for the U.S. markets, the dollar's strength is likely to be short-lived.
Underlying fundamentals for the greenback could not be much worse, and the fundamentals ultimately drive the greenback. In terms of relative trade balance fiscal balance, economic activity, inflation and political stability, the numbers are miserable. President Bush's approval rating falls into the last category, with presidential approval ratings historically having been reliable leading indicators of the U.S. dollar's relative worth.
With gold well over $500 per troy ounce and rising, the global markets are signaling inflation and general currency concerns, yet the dollar continues to put in a powerful performance. Still, the dollar rally is more speculative than fundamental, with the premium in annual growth in the SGS Financial-Weighted Dollar over the FRB Trade-Weighted Dollar at a level that generally precedes major dollar declines. As shown in the second graph, the current spread in annual growth is at its highest level since the dollar's last peak annual growth rate in November 2000.
What is behind the dollar's strength? Part of may it may be political, tied to still-accommodative foreign central banks helping the U.S. markets. Part of it also may be tied to an influx of petro-dollars. Part of it may be tied to swings in oil prices. With oil denominated in dollars, recent falling oil prices in the global markets would tend to trigger some offset in a rising dollar. On the other hand, the less-recent sharp rise in oil prices did not trigger a commensurate dollar sell-off. Whatever is propping the U.S. dollar is not primarily fundamental, and therein lies a significant risk for U.S. interest rates, equity markets and inflation.
In general, the broad economic outlook has not changed. The 2005 to 2007 inflationary recession continues to deepen, with its near-term development intensified a bit by Hurricane Katrina. Recession, inflation and risks of heavy dollar selling are upon us and continue to offer a nightmarish environment for the financial markets.
The Shadow Government Statistics' Early Warning System (EWS) was activated in May and signaled the onset of a formal recession early in July 2005. The EWS looks at historical growth patterns of key leading economic indicators in advance of major economic booms and busts and sets growth trigger points that generate warnings of major upturns or downturns when predetermined growth limits are breached. Since the beginning of 2005 a number of key indicators have been nearing or are at their fail-safe points, with four indicators moving beyond those levels, signaling a recession. Once beyond their fail-safe points, these indicators have never sent out false alarms, either for an economic boom or bust.
Negative GDP growth will not surface in regular government reporting until at least next year, now that it is clear that Katrina's impact has been neutralized in official reporting, and that political manipulation of the GDP, employment and CPI is rampant. The National Bureau of Economic Research (NBER) should time the downturn to mid-2005 and announce same sometime around mid-2006. Whether there is a recession or not will be a hot topic in the popular financial media early in 2006. Those Wall Street economists who act as shills for the market will keep up their "strong growth is just around the corner" hype regardless of any and all evidence to the contrary.
From the standpoint of common experience, this downturn will be considered the second leg of a double-dip recession, not an independent contraction as will be claimed officially.
Most economic data already are softening, and the trend will accelerate sharply, with regular monthly contractions seen for both payroll employment and industrial production, although political manipulation can keep the payroll data afloat for a while longer. Significant deterioration also will be seen in corporate profits and federal tax receipts. Lower tax receipts will combine with disaster recovery spending and the ongoing war in Iraq to accelerate deterioration in the federal deficit.
This outlook is predicated on economic activity that already has taken place and does not consider any risks from exogenous factors such as renewed terrorist activity in the United States, another major natural disaster or a financial panic.
Market perceptions of the downturn in business activity are mixed. When expectations begin to anticipate weak data, expectations also will be lowered for inflation, although stagflation still seems to be gaining in consensus thinking. Consensus forecasts generally will tend to be surprised on the downside for economic reports and on the upside for inflation reports, for some time to come.
The roots of the current difficulties are structural in nature. A consumer starved of income growth and overburdened with debt cannot sustain the real (inflation-adjusted) growth in consumption needed to keep GDP growth in positive territory. The income weakness is a direct result of the loss of a significant manufacturing base to offshore locations and the ensuing explosive, perpetual growth of the U.S. trade deficit.
Exacerbating economic and financial woes will be unusually high inflation during this contraction. Inflation, fueled by high oil prices, weakness in the U.S. dollar and accelerating Fed monetization of federal debt, will not be brought under control simply by weakness in economic demand. Instead, persistently high prices only will serve to intensify the 2005 to 2007 recession, making it unusually long and protracted. Ongoing inflation woes and dollar problems will maintain upside pressure on long-term interest rates, inhibiting the traditional flattening of the yield curve expected with a recession.
Risks of the current circumstance evolving eventually into a hyperinflationary depression remain extraordinarily high.
The unfolding inflationary recession is the worst of all worlds for the financial markets. Particularly hard hit will be the U.S. dollar, with downside implications for both equity and bond prices.
(NOTE: Each of these series is explored in the background series, A Primer On Government Economic Reports, available on the home page.
As discussed in this month's opening comments, heavy political manipulation of the big three market movers continues. The boom-time results of these popularly followed numbers are the focus of a propaganda blitz designed to boost the President's approval rating. Accordingly, reported results will have less than usual relevance to actual underlying activity, and upcoming reporting will be more determined by political need than the economic factors that sometimes drive results.
Employment/Unemployment -- Happily for the Bush II cheerleading squad, which already had booked this week's pep rallies, November's nonfarm payroll growth met market expectations of a 215,000 jobs increase, and unemployment held at 5.0%. It certainly would have been an embarrassment for the President, Treasury Secretary and Commerce Secretary, if November were another month with jobs growth that was statistically indistinguishable from zero.
The popularly followed seasonally-adjusted unemployment rate U-3 for November rose to 5.049%, luckily just missing a rounding-up to 5.1%. Such was up from October's 4.953%, with the monthly change holding within the published +/- 0.2% error margin. Unadjusted U-3 unemployment rose to 4.8% in November from October's 4.6%, while the broader U-6 unemployment measure rose from October's 8.1% to November's 8.4%. November's seasonally-adjusted U-6 rate held at 8.7% versus October. Including the long-term "discouraged workers" defined away during the Clinton administration, total unemployment remains roughly 12-percent.
For November, the household survey showed a seasonally-adjusted decline of 52,000 in household employment (the number of people with at least one job), following a 214,000 gain in October's number.
Moving contrary to the household survey, November payrolls showed a seasonally-adjusted gain of 215,000 (228,000 net of revisions) +/- 108,000, after October's revised 44,000 gain (was 56,000). Annual growth in unadjusted November payrolls was 1.47%, slightly higher than October's 1.42%.
Katrina's impact has been fully expunged as of the most recent data. Where September's initial jobs loss of 35,000 was revised to a loss of 8,000 last month, as of the November report, September nonfarm payrolls increased by 17,000 (an overall upward revision of 25,000). The funny thing is that unadjusted August payrolls were not revised, and unadjusted September numbers increased by only 1,000 in revision.
Thank goodness for the creative monthly recalculation of seasonal-adjustment factors at the Bureau of Labor Statistics (BLS)! In fairness, what had been shown as a 279,000 drop in September payrolls, in the alternate employment measure of aggregated state-by-state nonfarm payrolls, was revised to a loss of only 205,000 jobs in the latest release, a number still 222,000 shy of the politically-gimmicked number.
November's payroll gain of 215,000 included an upward bias of 18,000 jobs from the "net birth/death" adjustment to potential reporting entities, a level up from the prior year's 9,000 upside bias.
The latest report was against a background of unchanged October help-wanted advertising, an uptick in employment as reported in the various November purchasing managers surveys, and continued monthly deterioration in new claims for unemployment insurance (see the respective sections).
Next Release (January 6): December payrolls and unemployment reporting still are likely to be determined by heavy BLS manipulation. While underlying reality suggests continued deterioration in the jobs market, look for happy upside surprises in new jobs created. This appears to be part of an unfolding attempt at creating a statistical economic "miracle" for the Bush II administration, coming into the mid-term election year, much as Bush II tried coming into the 1982 election. For an extended period during the resulting Clinton Era, reported jobs growth was targeted at precisely 250,000 jobs per month, three million jobs per year. The miracle was that the Clinton manipulators got away with it, but then they had a friendlier press.
Looming in the following January 2006 employment report (due February 3rd) is the annual benchmark revision for March 2005. A downward adjustment of 191,000 will be made to unadjusted March 2005 payrolls, along with estimated monthly revisions spread out on both sides of the benchmark month, going back five years.
Gross Domestic Product (GDP) -- The "preliminary" estimate revision of annualized inflation-adjusted growth for third-quarter GDP ballooned to 4.28%, up from the initial 3.80% reporting, and up from 3.31% reported in the second quarter. Annual growth revised to 3.67% from 3.56%, now up slightly from 3.59% in the second quarter. These numbers are political propaganda and have little or no relationship to underlying economic reality.
As discussed last month, much of the faux growth came from using too low a GDP inflation rate. An understatement in the GDP deflator leads to a corresponding overstatement of real GDP growth. Against a parallel CPI inflation rate of 5.1%, the GDP deflator was 3.1% in initial reporting and stands at 3.0% in revision. Given the combination of long-term upside methodological biases built into the GDP and the deflation issues, an actual quarterly contraction of one-percent in third-quarter GDP would have been credible.
First estimates of alternate GDP measures Gross National Product (GNP) and Gross Domestic Income (GDI) also were published with this report, showing respective annualized quarterly real growth rates of 4.35% (versus 3.16% in the second quarter) and 4.52% (versus 2.03% in the second quarter). GNP is the broadest economic measure, incorporating GDP and the trade balance in factor income (interest and dividend payments). GDI is the income-side equivalent (in theory) of the consumption-side GDP.
Next Release (December 21): The "final" estimate revision for third-quarter GDP should be little more than statistical noise. Somehow, the "advance" estimate of first-quart 2006 GDP will beat the 2.8% annualized real growth suggested by the administration's recently revised annual GDP forecast (see opening comments).
Consumer Price Index (CPI) -- There has not been a new CPI release since the last newsletter. The recent decline in gasoline prices and Bureau of Labor Statistics' tendency to over-report near-term declines in energy prices, however, suggest a weaker overall upcoming monthly CPI report than the markets may be looking for. The Department of Energy shows gasoline prices down about 15% in November, which, by itself, would knock 0.6% off the monthly CPI. The upside shock for the markets could come from a stronger than expected "core" inflation rate.
The seasonally-adjusted October CPI-U increased by 0.2% (0.2% unadjusted), following September's 1.2% (1.2% unadjusted) surge. October's annual inflation eased to 4.35%, after September's annual inflation rate hit a 15-year high of 4.69%.
The "experimental" Chained Consumer Price Index (C-CPI-U), the fully substitution based CPI that presumably is the eventual replacement for current CPI reporting, showed annual inflation of 3.32% in October, versus September's 3.52%.
Adjusted to pre-Clinton methodology, annual CPI growth would be about 7.2% as of October, while the SGS Standard CPI, net of all the methodology changes of the last 30 years that were designed to suppress inflation reporting, stood at 8.1%.
Contrasted with the 2.1% annual Core CPI-U inflation rate that excludes the necessities of food and energy, the SGS Base CPI-U that includes only the necessities was up 4.7%. The latter rate, however, still suffers the standard CPI-U understatement.
Next Release (December 15): Inflation reports generally should surprise consensus forecasts on the upside, with "core" inflation increasingly reflecting the effects of higher energy prices. The November CPI, however, could be weaker than market expectations. An early estimate out in the public domain is for a consensus of a 0.4% increase. The recent sharp sell-off in gasoline, which would knock 0.6% off the monthly CPI, by itself, and which tends to get over-counted in BLS calculations when it is on the downside, would suggest a much weaker number.
Addendum
The early consensus estimate referenced above was indicated as +0.4% at the time the December SGS was released. In fact, this was in error, later corrected to minus 0.4%. Therefore, the consensus outlook is for a relatively sharp decline in the overall CPI when released on December 15th, in line with the above analysis.
Despite occasional one-month swings, annual inflation will remain high and should begin to accelerate to the upside, again, by early 2006. With seasonally-adjusted monthly inflation reported at 0.3% for November 2004, monthly November 2005 inflation above or below that will move the reported annual inflation rate in tandem.
To varying degrees, the following series have significant reporting problems. All series (including the more trouble free) will be addressed in a monthly "Reporting Focus," with this month's analysis updating the federal deficit reality in terms of the disclosures in the 2005 GAAP financial statements of the U.S. government, to be published as a separate supplement.
In addition to the big three, other series that have been detailed are:
* The Federal Deficit (an original background article and an update in the Alert of July 7, 2005),
* Consumer Confidence (November 2004 SGS),
* The Trade Balance (December 2004 SGS),
* Industrial Production (January 2005 SGS),
* Initial Claims for Unemployment Insurance (February 2005 SGS),
* Retail Sales (March 2005 SGS),
* Alternate Payroll Employment Measures (April 2005 SGS),
* Money Supply - Part I / SGS Early Warning System (May 2005 SGS),
* Money Supply - Part II (June 2005 SGS),
* Financial- and Trade-Weighted U.S. Dollar Indices (July 2005 SGS),
* Short-Term Credit Measures (August 2005 SGS),
*Income Variance/Dispersion (September 2005 SGS),
*CPI (an original background article and October 2005),
* M3 (update November 2005 Supplement).
Federal Deficit -- The U.S. Treasury is due to release its GAAP (generally accepted accounting principles)-based 2005 (fiscal year-ended September 30th) statements of the federal government's operations, on December 15th. The results should show an actual 2005 shortfall in the $4 trillion range (net of one-time adjustments), against the official, accounting-gimmicked 2005 deficit of $318.6. Last years' GAAP-based deficit was $11.1 trillion, including a one-time set up charge for Medicare enhancements. The official, accounting-gimmicked deficit at the same time was $412.8 billion. The 2005 GAAP statements will be the subject of this month's "Reporting Focus," which will be published as a supplement on December 19th.
Separate from the GAAP-based numbers and official deficit reporting, the change in gross federal debt is a fair indicator of actual net cash outlays by the government. As of September 30, 2005, the gross federal debt was $7.933 trillion, up $554 billion from September 2004, which, in turn, was up by $596 billion from September 2003.
As of October 2005, the first month in fiscal 2006, the twelve-month rolling accounting-gimmicked deficit narrowed further to $308.4 billion, against $400.6 billion in October 2004. The gross federal debt as of October 31st totaled $8.027 trillion, up $597 billion from October 2004, which, in turn, was up $557 billion from October 2003.
While there has been no new deficit reporting since that last newsletter, the gross federal debt as of November 30th was $8.092 trillion, up $567 billion from November 2004, which, in turn, was up $599 billion from November 2003.
Going forward, the official federal deficit will be inflated quickly by billions allocated to disaster reconstruction and to the ongoing war in Iraq. Government finances also will suffer tax revenue losses from the intensifying recession. While GDP growth estimates can be gimmicked, incoming tax receipts will remain an independent estimate of underlying economic reality.
Initial Claims for Unemployment Insurance -- Annual growth in initial claims still is picking up (an economic negative), even though the spike from the severe hurricane season has fully entered and is passing through the 17-week moving average. On a smoothed basis for the 17 weeks ended November 26th, annual growth rose to 2.6% from the 1.8% gain seen change in the 17 weeks ended November 12th. The current weekly levels should continue running above a year ago, confirming a recession.
The volatility of the seasonally-adjusted weekly numbers is due partially to the seasonal-adjustment process. When the series is viewed in terms of the year-to-year change in the 17-week (three-month) moving average, however, such is a fair indicator of current economic activity.
Real Average Weekly Earnings -- No new data have been released since the last newsletter. October's earnings gained 0.4%, following September's 1.0% decline, thanks to the lower October CPI increase. October's real earnings fell 1.6% from the year before, after September's 2.3% drop.
Volatility in this series comes primarily from variations in reported CPI growth. Allowing for the biases built into the CPI-W series used to deflate the weekly earnings, annual change in this series signals a deepening recession.
Retail Sales -- There have been no new formal releases since the last newsletter, but anecdotal evidence suggests that the holiday shopping season did not get off to a brilliant start. Keep in mind that any annual sales increases of four percent or less are not staying ahead of official inflation.
In current dollars, October's seasonally-adjusted monthly retail sales fell by 0.1% +/- 0.7%, after September's sales rose by 0.3%, growth rates that also are below official CPI inflation. When monthly retail sales growth net of inflation contracts, GDP growth normally tends to follow the same pattern.
Inflation-adjusted year-to-year growth in retail sales below 1.8% (using the official CPI-U for deflation) signals recession, and October's annual growth on that basis was 1.45%, down from 1.95% in September.
Next Release (December 13): November retail sales should come in below expectations, reflecting impaired economic activity.
Industrial Production -- There has been no update to industrial production since the last newsletter. Seasonally-adjusted October production rose by 0.9% (0.7% net of revisions), after September's 1.5% tumble, which was blamed largely on the Gulf Coast catastrophes. Despite the October rebound, anecdotal evidence suggests that significant energy-related facilities in the Gulf Coast area still are not back in production. Year-to-year growth generally has slowed since the December 2004 near-term peak of 4.4%, with October annual growth at 1.9%.
Next Release (December 15): Industrial production increasingly will mirror the recession, entering a series of regular monthly contractions. Upcoming reports will tend to surprise market expectations on the downside.
New Orders for Durable Goods -- Seasonally-adjusted new orders for durable goods rose by 3.4% (3.6% net of revisions) in the month of October, following a 2.0% (was 2.1%) September decline. Year-to-year growth in October surged by 11.1%, after September's 6.5% (was 6.4%). The widely followed nondefense capital goods orders rebounded by 2.7% following September's 8.6% (was 8.1%) plunge.
Durable goods orders once was one of the better leading indicators of broad economic activity, when smoothed using a three-month moving average. After the semi-conductor industry stopped reporting new orders, however, the series' predictive ability suffered a serious setback.
Trade Balance -- There has not been a trade deficit update since the last newsletter. The seasonally-adjusted September trade deficit in goods and services widened to a record $66.1 billion, from $59.3 billion in August. It is not clear how much these numbers have been affected by data-flow disruptions or trade disruptions related to the hurricanes. Such will clear up with time.
Next Release (December 14): The October trade deficit could narrow if the September deficit surge was due partially to storm-related cuts in export flows. Nonetheless, new record monthly deficits will follow in the months ahead.
Consumer Confidence -- November Consumer confidence enjoyed some rebound but continued at growth levels still consistent with a recession. The Conference Board's consumer confidence rose by 16.1% after October's 2.6% decline, while the University of Michigan's consumer sentiment rose 10.0% following a 3.5% drop in October. It is not unusual for the seasonally-adjusted Conference Board number (the unadjusted series never is released) to rebound with some hoopla at the opening of the holiday shopping season.
On a three-month moving-average basis, the Conference Board and University of Michigan November 2005 readings showed respective annual deepening rates of decline of 3.8% and 17.6%. These lagging, not leading, indicators are signaling that the economy is in intensifying recession.
Short-Term Credit Measures -- With new numbers available since the last newsletter for only commercial paper outstanding, short-term credit measures for businesses continued to show strong annual growth, well over 10 percent, with annual growth in consumer credit having slowed to below four percent.
Seasonally-adjusted consumer credit showed no growth in September, with annual growth slipping to 3.7%, down from 4.3% in August. Without growth in income, growth in personal consumption can be supported short-term only by debt expansion or savings liquidation, and debt expansion is slowing.
Annual growth in commercial paper outstanding increased to 19.7% in November, up from 17.4% in October. Annual growth in commercial and industrial loans was 13.6% in October, following September's 12.8%. Rising sales can fuel short-credit needs, but so too can slowing sales, slowing collections and rising inventories.
Producer Price Index (PPI) -- There have been no new data since the last newsletter. The seasonally-adjusted October finished goods PPI rose by 0.7% (1.3% unadjusted) following September's 1.9% (1.8% unadjusted) monthly gain. October's 5.9% annual inflation rate softened from September's 6.9%, which was the highest annual PPI inflation rate in 24 years.
Next Release (December 20): Despite a large component of random volatility in monthly price variations, PPI inflation reporting over the next several months should continue, in tandem with the CPI, to top market expectations. While inflation should be worse than consensus forecasts, particularly in the "core" inflation measures, the numbers should be softer in the next month or so, thanks to somewhat weaker energy prices.
Purchasing Managers Survey (Non-Manufacturing) -- Published by the Institute for Supply Management (ISM), there is nothing unusually wrong with this survey of the service industry, except it does not have much meaning. Unlike its older counterpart, the manufacturing survey, if service companies such as law firms, hospitals or fast-food restaurants have "increased orders," that does not necessarily mean that economic activity is increasing.
The overall November index eased by 2.5% to a level of 58.5, following October's 12.6% surge to 60.0. The index is a diffusion index, where a reading above 50.0 indicates a growing service economy, in theory. Both the employment and prices paid components, however, have some meaning.
The November employment component rose to 57.0 from 52.9 in October, suggesting an employment pickup in the service sector.
The prices paid component diffusion index is a general indicator of inflationary pressures. The November index eased 4.9% to 74.2 from October's 78.0. The November reading, however, still is highly inflationary, and, on a three-month moving average basis, the annual change in November rose to 8.1% from October's 6.4%.
The following numbers are generally good-quality leading indicators of economic activity and inflation that offer an alternative to the politically-hyped numbers when the economy really is not so perfect. In some instances, using a three-month moving average improves the quality of the economic signal and is so noted in the text.
Economic Indicators
Purchasing Managers Survey (Manufacturing) - New Orders -- The November new orders index dropped 3.1% to 59.8 after October's decline of 3.3% to 61.7. The measure breached its fail-safe point a number of months back, generating an SGS early warning indicator of pending recession.
The Commerce Department provides suspect seasonal factors for this series, and adjusted monthly numbers often can be misleading in the reporting of month-to-month change. This problem is overcome by using year-to-year change on a three-month moving average basis. On that basis, November's index was up 3.0% following October's 0.3% increase. The index gradually has notched lower from its peak annual growth of 36.6% in April of 2004, but has shown something of an uptrend in the last several months.
Published by the Institute for Supply Management (ISM), the new orders component of the purchasing managers survey is a particularly valuable indicator of economic activity. The index is a diffusion index, where a reading above 50.0 indicates rising new orders. The overall November ISM index softened again, easing to 58.1 from October's 59.1. An index level of 50.0 divides a growing versus contracting manufacturing sector. The November employment component increased from 55.0 to 56.6.
Help Wanted Advertising Index (HWA) -- SGS temporarily has suspended its regular analysis of help-wanted advertising due to mistakes being made in Conference Board reporting. The field of available measures for this key indicator will be surveyed in next month's "Reporting Focus."
That said, the current reporting of the series shows the October index holding at 38.0 for the third month, up 3.6% annually on a three-month moving-average basis. At best, the series has continued to bottom bounce since the onset of the last recession.
Housing Starts -- There have been no new data since the last newsletter. October housing starts fell 5.6% from September, which had gained 2.5% from August. Year-to-year, October starts were down 2.3%. On a three-month moving average basis annual growth has slowed to 3.9%, at the brink of generating a recession warning signal.
Money Supply -- Annual money supply growth continues to show solid indications of recession. Before inflation adjustment, M1, M2 and M3 monthly changes for November (preliminary estimate based on three weeks of data) versus October were up 0.3%, 0.3% and 0.3%, versus up 0.3%, up 0.6% and up 0.8% respectively. Year-to-year rates of change in seasonally-adjusted November and October M1, M2 and M3, respectively, were down 0.3%, up 3.7% and 7.3%, and up 0.6%, 4.1% and 7.3%.
Adjusted for CPI inflation, November's M1, M2 and M3 annual year-to-year rates of change were down 4.5%, down 0.7%, and up 2.8%, respectively, versus down 3.6%, down 0.2% and up 2.9% in October. On a three-month moving average basis, the November annual rates of change were down 4.1%, down 0.6% and up 2.5%, levels that remain well underwater using the old-style CPI.
The furor surrounding the Fed's dismemberment of M3 has not caused the U.S. central bank publicly to reconsider its position, so far. It would be unfortunate for the Fed if should attain a reputation as a political propaganda arm of the administration, much as the BLS and BEA have.
Inflation Indicators
Purchasing Managers Survey (Manufacturing) - Prices Paid -- The November prices paid diffusion index remained strong, though it was down 11.9% from October to 74.0, following October's 7.7% gain to 84.0. The current level signals an ongoing serious inflation problem. On a three-month moving average basis, November's year-to-year change swung into positive territory, again, up 3.3%, after October's 4.9% decline.
Published by the Institute for Supply Management (ISM), the prices paid component of the purchasing managers survey is a reliable leading indicator of inflation activity. The measure is a diffusion index, where a reading above 50.0 indicates rising inflation.
Oil Prices -- West Texas Intermediate Spot (St. Louis Fed) has continued backing off September's highs, averaging $58.30 per barrel in November, down 6.5% from October's $62.37, but the pattern is somewhat similar to last year's price movements. Oil prices remain at highly inflationary levels, with November's average price up 20.3% from November 2004, up from October's 17.4% gain. Prices have edged higher, again, in early-December trading.
Spot prices have and will continue to gyrate. Despite ongoing near-term price volatility, high oil prices will continue as a major contributing factor to the inflation side of the current inflationary recession. Oil price changes permeate costs throughout the economy, ranging from transportation and energy costs, to material costs in the plastics, pharmaceutical, fertilizer, chemical industries, etc. Anecdotal evidence is strong that cost pressures have already passed into the so-called "core" inflation sectors.
Oil price volatility affects CPI reporting. Downside oil price movements tend to be picked up more quickly and fully by the BLS in its inflation measures than are upside movements. For example, the recent plunge in gasoline prices will show up more fully and quickly in the CPI than did the recent surge in oil prices. Even as currently understated, CPI and PPI inflation should be much stronger than commonly predicted for the next six-to-nine months, partially as a result of continued high oil prices.
U.S. Dollar -- The Shadow Government Statistics' Financial-Weighted U.S. Dollar Index is based on dollar exchange rates weighted for respective global currency trading volumes. November's monthly dollar average rose sharply, up 4.9% for the month, after October's 2.0% gain. Year-to-year change exploded to an 11.4% gain, the strongest growth since November 2000, after October's 2.2% gain.
Dampened by its stronger weighting of the Canadian dollar, November's monthly average of the Federal Reserve's Major Currency Trade-Weighted U.S. Dollar Index rose by 1.7%, after October's 1.6% increase. November's rate of annual change also surged, up 7.0%, the strongest growth since January 2002, following September's 1.1% gain.
The dollar's rally has continued in early-December trading. As noted in this month's opening comments, however, the relative strength in the financial- versus trade-weighted dollar is beyond the level that usually precedes a dollar sell-off.
Underlying fundamentals remain extraordinarily negative for the greenback. With serious shocks still looming in U.S. economic and fiscal data, heavy selling pressure against the U.S. currency could break at any time, with little warning. New record lows for the dollar still remain likely in the months ahead, despite any overt or covert supportive intervention by any central bank(s).
Generally, the weaker the dollar, the greater will be the ultimate inflation pressure and the eventual liquidity squeeze in the U.S. capital markets.
* 2005 GAAP Financial Statements of the United States Government
This month's "Reporting Focus" will be published as a separate supplemental report on December 19th, based on the scheduled U.S. Treasury release of the 2005 GAAP financial statements on December 15th. The latest Treasury reporting will be assessed against both the accounting-gimmicked official federal deficit numbers and prior GAAP reporting.
* Help Wanted Advertising and Alternate Measures
Help-wanted advertising historically has been a reliable indicator of underlying business activity and pending employment activity. Apparent reporting difficulties at the Conference Board have raised issues of ongoing reliability of the traditional series that measures advertisements in newspapers, while new measures of on-line Internet help-wanted advertising have been created. Both the old and new series will be explored.
This still-pending supplement has been rescheduled for a mid-January 2006 release, separate from the January newsletter. It will complete the introduction of SGS's alternative CPI measure, the SGS Standard CPI, including the formal reporting methodology, first reporting results and a reconstructed historical data base that will link back to pre-Jimmy Carter official CPI eporting. A precise release date will be announced as much in advance as possible.
Best wishes to all for a joyous holiday season!
January's Shadow Government Statistics is scheduled for release on Wednesday, January 11, 2006. The monthly newsletter regularly is scheduled for posting on the Wednesday following the Friday release of the employment statistics. The posting of the next SGS on the website, as well as any supplements or interim alerts, will be advised immediately by e-mail.